(Bloomberg) – The emergence of a more contagious Covid-19 strain and the prospect of a less favorable U.S. monetary policy point to the risk of a more turbulent trajectory for the equity bull market.

Strategists warn of volatility but still expect more gains for stocks during 2021, arguing that vaccines will help economies reopen. This mix would mark a change from the first half of the year, when the Cboe Volatility Index, or VIX, fell to pre-pandemic lows as the S&P 500 jumped 14% on a tide of liquidity.

“We are not happy with the potential for trouble and neither should investors be,” BCA Research strategists, including Doug Peta and Sara Porrello, wrote on Monday. They reiterated their recommendation to overweight equities but warned of the need for a “detailed action plan in the event of significant negative surprises”.

A sense of fear may be evident in some corners of the market, with the Cboe Skew Index, which tracks the cost of protecting stocks from tail risks near an all-time high. Concerns over variants of the virus and the possible reduction of one-size-fits-all stimulus have long clouded the bull market, but are becoming more urgent after global stocks have risen nearly 90% since the pandemic lows in March.

The picture also varies by region, as Asian stocks lag behind this year’s rally in the US and Europe. According to Kyle Rodda, analyst at IG Markets, markets are realizing they need to consider the risk of Covid-19 persisting, and investors will reward countries with better vaccine capacity, which will help explain part of the this disparity.

“We advise investors to prepare for future bouts of volatility,” wrote Mark Haefele, investment director for global wealth management at UBS Group AG, in a note, while adding that recent records are not an obstacle to further gains.

Delta problem

The epidemics of the delta strain are a reminder that the battle against Covid-19 is far from over and that more troublesome variants remain a risk. Yet for now, price pressures are mounting as the global economy reopens, leading several central banks to begin or consider withdrawing emergency stimulus measures.

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“Strong markets remain strong,” wrote analysts at Fundstrat Global Advisors LLC, co-founded by Tom Lee, in a note. The median return in the second half of the year is 9% in years when the S&P 500 rises more than 13% in the first six months, they said. But they added that July could be “brutal” as history suggests it tends to be a tough month after a solid first half.

Proliferation of Covid-19 variants increases the risk of a ‘Black Swan’ event, according to Viktor Shvets, head of Asian strategy at Macquarie Capital, referring to something unique and unexpected that has a major impact .

“Essentially, you have to be prepared for high earnings volatility, as churning within and between asset classes and styles increases, even if the overall indices remain flat,” Shvets wrote in a note.

(Updates with markets in second paragraph.)

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